Districts Adjust Spending to Post-Recession Reality

School systems wrestle with how to manage their money and deploy staff resources

Five years after the nation plunged into a deep economic recession, school districts are learning to make do with less—and, in some cases, dramatically changing how they spend their money and deploy their teaching staffs.

The financial challenges facing districts are numerous. In 2011, the latest for which data are available, per-pupil spending dropped for the first time in 40 years, according to the U.S. Census Bureau. Federal education aid is more unstable than ever, as a dysfunctional Congress enacted across-the-board cuts last year to all federal spending—called "sequestration"—and sparked a government shutdown after getting mired in budget talks.

For the most part, the long-term implications are just starting to sink in.

"We are at a place where mind-sets are definitely changing, which has to precede big change," said Karen Hawley Miles, the president and executive director of Education Resource Strategies, a Massachusetts nonprofit that works with urban districts to rethink how they allocate resources. "But this is a fragile step forward. We're at a very vulnerable moment."

Districts are still feeling the effects of the recession that gripped the country starting in 2008. Dramatic cuts in K-12 spending ensued, and school funding hasn't recovered to prerecession levels.

Spending Picture

In the 2007-08 school year, just as the recession was beginning, total K-12 spending was nearly $600 billion, according to the National Center for Education Statistics. During the 2010-11 school year, the latest for which data are available, spending had dropped to $520 billion.

The economic-stimulus package Congress passed in 2009, which poured some $100 billion in federal money into education, has largely been spent, although the Obama administration's stimulus-era grant competitions such as Race to the Top and Investing in Innovation are still being funded to a lesser degree. And importantly, new Race to the Top contests are being aimed at districts.

Many urban districts that have had a long-troubled financial past have plunged into a money crisis even as the nation as a whole is recovering from the recession. Detroit is bankrupt, and its schools have been run by an emergency manager since 2009. In Philadelphia, the financial crisis got so bad in July that it elicited a rare public statement from U.S. Secretary of Education Arne Duncan, who urged the state, city, and district to "invest in public education, not abandon it."

Urban districts, in particular, are under severe pressure to dramatically rethink how they run their schools, Ms. Miles said, and that has fiscal-management implications.

For example, those districts are highly unionized, and most still have high-cost legacy labor contracts and practices that were established in an era when school funding tended always to increase.

What's more, most urban districts now include—and compete with—charter schools that are challenging them to think differently about how they educate their students.

Although the research is mixed, charter schools, whose teachers typically are not unionized and often do not have high-priced labor contracts, are seen by some critics as having negative fiscal impacts on district-run schools, especially in places experiencing declining enrollment and economic scarcity.

Charter schools, however, do not receive the same types of support as district schools, often getting little to no funding for their facilities and receiving a smaller per-pupil allotment than regular district schools.

States, and their districts, are responding in several ways that are affecting how K-12 dollars are spent.

Cleveland is among those districts that are turning to so-called weighted-student funding to better direct scarce dollars to students who need it most. Using that strategy, a district might, for example, allocate more money to a student with a disability who was also an English-language learner than to a student without that designation. That means schools with high concentrations of students at risk of academic failure would get more money than schools enrolling students with fewer academic deficiencies.

In May, Cleveland ratified a teachers' contract that does away with automatic raises based on years of experience or training courses completed in favor of raises based on teacher performance and leadership roles.

Denver is embarking on a "strategic school design" project that is training principals to remake their school day, on a school-by-school basis. That could mean staggering teacher schedules to open up more collaboration time or providing more-intensive tutoring for struggling students. The fiscal implications here are grounded in a simple concept: The district is trying to do more with less.

Meanwhile, Louisiana and Tennessee have set up special turnaround districts of low-performing schools that are run by the state, all with financial implications.

Pension Storm Brewing

Another financial factor is looming large over districts that cannot be ignored: the cost of retirement benefits. As the aging Baby Boom population gets ready to retire, states and districts are finding growing gaps in their fund balances that will be needed to pay benefits. A 2012 estimate by the National Council on Teacher Quality, a Washington advocacy group, puts the cumulative, unfunded liability at $325 billion. The same group has estimated that at least 40 states have cut retirement benefits that affect all teachers as a result.

"This is going to be a huge factor going forward," said Josh McGee, the vice president for public accountability at the Laura and John Arnold Foundation in Houston. "We're quickly approaching a place where a huge share of compensation is on legacy costs. We are paying for past service and not seeing as much money going into today's classrooms. It could get even worse going forward."

A September 2013 report by Mr. McGee and Marcus A. Winters of the Manhattan Institute, a conservative-leaning think tank, suggested that districts could take big steps toward closing the gap. At little cost, states and districts could do two things: put more money into salaries and less into benefits, and smooth out retirement payouts over teachers' careers so they don't see large jumps in benefits as they near retirement age.

Few states, however, are making fundamental pension-system changes that aren't just cutting benefits or delaying the pain. One exception is Kentucky, Mr. McGee said, which transformed one of the worst-funded systems for its government workers in the country. The state created a new pension plan that will be fully funded, put a halt to cost-of-living increases unless they're paid for, and raised an additional $100 million from taxes and from other funds to cover gaps in the original pension plan. Unfortunately, Mr. McGee said, the also-underfunded teachers' retirement system in Kentucky was not touched by the new law.

Oregon, however, did tackle the teacher-retirement issue by approving last year a "grand bargain" that raises taxes, increases school funding, and reduces the unfunded pension liability.

Generally, Mr. McGee said, there's not a huge public outcry to change pensions because there's a "lack of understanding of what the benefit offers and what reform could look like."

Regardless, he said, it's important to note that most districts cannot change their pension systems; that power usually rests with states.

Getting Creative

Increasingly, districts are looking for creative approaches both to funding and to making decisions over the money they do control.

Ronald A. Skinner, the deputy executive director of the Association of School Business Officials International in Reston, Va., said some districts are turning to public-private partnerships to seek outside money from companies and foundations to boost their budgets. The grandest example of a private boost is perhaps Facebook co-founder Mark Zuckerberg, who in 2010 donated $100 million to Newark, N.J.

Districts also are in the beginning stages of shifting the role of their chief school business officials from being strictly that of an accountant to being a member of the strategic instructional team.

"You wouldn't run a multimillion-dollar corporation without a CFO," said Mr. Skinner, "yet school districts often just have an instructional team leading the district and don't have that financial and operational leadership."

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